On 11 September 2014, the Supreme Court of New South Wales delivered judgment in Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251.

The decision reminds directors of the risks associated with their involvement in transactions where they are in a position of conflict.


The proceeding concerned two transactions that occurred in December 2006 between two companies in the Allco group of companies: Allco Funds Management Limited (AFML) and Records Funds Management Limited (RFML). Importantly, Timothy Rich and Christopher West were directors of both companies.

At the time, AFML owned about half of the units in a wholesale property fund, known as Allco Wholesale Property Fund (Fund). AFML was the manager of the Fund and RFML acted as responsible entity.


By mid-December 2006, a stamp duty issue emerged in relation to the Fund which, if left unresolved, exposed the Fund to $1.8m of duty.

Timothy Rich proposed a solution that saw the Fund redeem AFML’s units (worth approximately $109 million) and simultaneously create a loan of the same value back to the Fund. The effect was to convert AFML’s beneficial equity interest into a loan made repayable in 2 years, with a right to receive interest payments equivalent to the distributions AFML would have received as a unit holder.

This proposal was formalised in a loan agreement dated 15 December 2006 between AFML and RFML (Loan Agreement). The Loan Agreement was executed, on behalf of AFML, by 2 of its directors, Timothy Rich and Andrew Rutherford, and on behalf of RFML, by Tom Lennox (RFML’s company secretary) and Christopher West.


Shortly after the conversion from equity to debt, some accounting problems emerged for the Fund. The parties found that the conversion from debt to equity affected the profitability of the Fund because payments made to AFML as interest, although tax deductible, reduced the profits of the Fund. In addition, the conversion had implications for the Fund’s unit price.

The parties determined that the accounting problems would be resolved if the Loan Agreement were amended in a way that would allow the loan to be treated as equity for accounting purposes, but so as to preserve its nature as debt for stamp duty purposes. It achieved this by removing the 2 year term and, practically speaking, making the repayment date of the loan entirely at the discretion of the borrower (RFML).

This proposal was formalised in an amending deed to the Loan Agreement (Deed of Amendment) in early February 2007 between AFML and RFML. The Deed of Amendment was executed, on behalf of AFML, by Christopher West and Andrew Rutherford, and on behalf of RFML, by Christopher West and Timothy Rich.

Whilst the Deed of Amendment resolved the accounting and unit price issues of the Fund, it also had the practical effect of stripping AFML of any enforceable rights it had to receive repayment of its loan, which then had a face value of $109m.


In 2008, Allco collapsed and receivers were appointed to AFML. A short while later, the unit holders in the Fund caused the replacement of the responsible entity and the termination of AFML’s management agreement. Trust Company (RE Services) Limited (Trust Company) became the new responsible entity of the Fund and, by virtue of s 601 FS(1) of the Corporations Act 2001 (Cth) (Act), RFML’s rights, obligations and liabilities became those of Trust Company.

Since its appointment as the responsible entity, Trust Company (on the advice of the Fund’s investment manager, Arcadia Funds Management Limited) has reorganised the capital structure of the Fund. That reorganisation has had the effect of denying AFML of any interest on the Loan Agreement while at the same time providing a return to the other unit holders on their investments in the Fund.


Against that background, the receivers and managers of AFML commenced proceedings in 2012 to set aside the Deed of Amendment, or alternatively, to set aside both the Loan Agreement and the Deed of Amendment on the basis that:

  • each was approved by directors of AFML in beach of their fiduciary and statutory duties to AFML. Those duties included a duty to avoid conflicts of interest (in this case, their competing duties to AFML and RFML), and a duty to act in the best interests of AFML and for a proper purpose; and
  • by treating AFML as a bare lender with no unit holder rights, Trust Company had engaged in and continued to engage in unconscionable conduct in contravention of ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).

Trust Company argued that the transaction was devised to benefit both AFML and the Fund. Both directors who approved the transaction gave evidence that they believed the transaction was in the interests of the Allco Group, including AFML, and that the agreements were not intended to alter the economic outcome for either party.


In his judgment, Justice Hammerschlag agreed with AFML that the directors were in a position of conflict and that the transactions were not bona fide in the best interests of AFML or for a proper purpose.

In coming to his decision, his Honour reiterated that the rule against conflicts is so strictly adhered to that no question as to the fairness or otherwise of any arrangement entered into may be raised.

Immediately prior to the Deed of Amendment, AFML had a legally enforceable right to repayment of the loan within 2 years and RFML had a corresponding legally enforceable obligation. The Deed of Amendment deprived AFML of those rights; it left repayment of principal and payment of interest effectively at the discretion of the borrower.

This amounted to a clear conflict of interest between the two companies and put those who were directors of both companies, Timothy Rich and Christopher West, in a position of conflict.

The evidence of the directors, while accepted, ignored the fundamental nature of a director’s obligations to promote the company’s (ie. AFML’s) best interest. In the context of such breach of directors’ duties, the fairness or otherwise of the transaction is irrelevant.

Given his Honour found in favour of AFML in relation to the fiduciary duties owed to it, Hammerschlag J found it unnecessary to deal with the further grounds raised by AFML. Nevertheless, his Honour made certain remarks about those matters.

In relation to the claim for breach of sections 181(1) and 182(1) of the Act, Hammerschlag J held that the actions of Rich and West were in breach of those provisions. His Honour found that neither Rich nor West paid particular attention to the legal and economic interests of AFML, but were more concerned with the broader, more general interests of the Allco Group. The Court concluded that, when attention was focussed on the particular interests of AFML, no reasonable person in the position of Rich and West could reasonably have concluded that the Deed of Amendment was in the best interests of AFML.

In respect of the unconscionability claim, AFML did not succeed on its case as the Court considered it had been pleaded. However, his Honour found that Trust Company had engaged in unconscionable conduct in seeking to maintain its rights under the Loan Agreement and Deed of Amendment in the knowledge that they were entered into by directors in breach of their fiduciary duties and that AFML now seeks rescission of those agreements.


Having found that the directors were in a position of conflict when they entered into the agreements, the Court granted relief allowing AFML to elect to have the Loan Agreement and the Deed of Amendment rescinded ab initio. AFML made that election, the practical effect of which was to restore AFML as a unit holder of the Fund. The Fund is currently understood to have net assets in the order of $190 million. AFML’s 47% share has an attribution value of approximately $90 million.


This decision highlights the risks associated with the involvement of directors in transactions in which they are in a position of conflict, particularly where those directors conduct business in the context of a corporate group of companies. It reminds us that where fiduciary duties are concerned, the conflict rule is strictly adhered to. Where a conflict is established, the Court does not inquire into the fairness or otherwise of the transactions. The rule is inflexible.

A contract made in breach of the directors’ fiduciary duties will be voidable at the option of the company unless the articles of association of the company provide otherwise, or the director makes a full disclosure of the nature of his or her interest in the contract to the members of the company who must approve the contract by ordinary resolution.